What Amazon Didn't Say in Its Blog Post about Hachette

If you mean to murder me, then bloody well get on with it. You took my sword, my horse, and my gold, so take my life and be done with it...but spare me this pious bleating.

Sandor Clegan - The Storm of Swords by George R.R. Martin

Amazon has come forth and told unto us it is waging holy war against Hachette for lo! The children. For only lower book prices can save the children—and indeed publishers and authors, too—and those greedy publishers are too stupid to understand.

Plus, Amazon has some numbers to back it up.

Save me, Amazon Superhero!

Man, Amazon is good at this stuff. A whole host of media outlets spread Amazon's good word faithfully and truly. Who cares if it's a bunch of crap?

I do, and I'm happy to talk about the things that Amazon conveniently left out.

Firstly, the blog post is posted in full at the end of this piece (page 4). Allow me to summarize:

Amazon's blog post was ostensibly explaining exactly what it and Hachette are fighting over.

Amazon said that it is happy taking just 30% for its ebook cut—this is contrary to some reports that said Amazon wanted a higher percentage. It's unclear if this has always been the case, or if that is only Amazon's recent stance.

Amazon wants ebooks to top out at US$9.99 per book.

The company said its data shows that ebooks are highly price-elastic, meaning that books that cost less sell in higher volume. Amazon specifies that its data shows a, "$14.99 [ebook] would sell 1.74 copies if priced at $9.99," and it used units of 100,000 per title to make its point (even though few books sell in such quantities).

As part of its argument, Amazon noted that the lower costs associated with ebook distribution are a strong argument for lower prices. (Even though Amazon knows that "the elimination of manufacturing and distribution costs are being offset by retail price reductions and the three additional costs" of ebook production, as explained by former publisher Michael Hyatt [link corrected].)

Amazon says this is a huge winwin because selling 174,000 books at $9.99 represents 16 percent more revenue than selling 100,000 books at $14.99.

Amazon also made another play at pitting authors against publishers by saying Amazon feels like authors should get 35 percent instead of the 25 percent they currently get for ebooks (to its credit, Amazon didn't mention the even lower percentage authors get for physical book sales).

It all sounds so good, right? Amazon is just trying to help those old fuddy-duddy publishers make more money, but those publishers are too stupid to let them. Right?

Page 2 - Digging Into the Numbers

What makes me so snarky is that Amazon's blog post is so easy to destroy, but all the mainstream coverage I read blithely passed Amazon's message along without even a little effort at analyzing it. So let's get to it.

There's no doubt that Amazon's numbers are more or less correct, but those numbers are only part of the story—the part of the story that fits Amazon's preferred narrative. For instance, how do ebooks at $12.99 do when compared to $14.99?

Amazon said that ebooks are highly price elastic, so a $12.99 ebook will also sell more units than if it was priced at $14.99. How many more? I don't know, but what if it was 50 percent more? That's a full 32 percent less than Amazon said the $9.99 price point would sell, so I doubt it's that out of line.

150,000 ebooks at $12.99 would net 30 percent more than 100,000 units at $14.99 and 12 percent more than 174,000 at $9.99.

If the effect is more limited, say 40 percent more books, everyone nets 21.3 percent more revenue. That's still more than the 16 percent increase Amazon says it is fighting for, and let's never mind the lower support and sales costs for Amazon. Even if it's just 34 percent more books compared to the 74 percent increase at the $9.99 price, we're at revenue parity, where Amazon's profits are still higher due to lower support and sales costs.

What about the $13.99 price point? Or the $11.99 price point? Or $10.99? All of these price points come with their own price elasticity, and somewhere there's an optimal price point. I don't know what it is, but I certainly don't trust that the single data point offered by Amazon is the whole story.

Measurements of price elasticity almost always form some kind of parabola. It's possible that an enormous chunk of Amazon's 74 percent increase occurs only at the $9.99 price point (the "less than $10" price point, as it were). Personally, I doubt it, but I'm neither a mathematician nor an economist. I don't have the numbers to back that up and Amazon didn't give us that broader look.

Why? My guess is that the $9.99 price point was picked by Amazon for this public salvo because Amazon has identified $9.99 as the pain point for would-be retailing competitors. I suspect that $9.99 is the price point that delivers maximum benefit to Amazon's goal of having all the market share while still leaving some money on the table for profit.

Any more leaves too much incentive for competition and any less unnecessarily reduces profit.

Otherwise, I think we'd be hearing about the 100 percent increase in volume sales at $8.99—note that I'm pulling those numbers out of thing air—because 200,000 books at $8.99 brings in more revenue than 174,000 books at $9.99. 100 percent increase is a nice, round talking point, too.

Taking it even further, 120 percent at $7.99 would also bring in more revenue. Like I said, I suspect both numbers are below that pain point Amazon wants to hit.

But wait, there's more. Amazon is offering us data in a market where most best sellers are $12.99-$14.99 (with a few that are higher or lower). Amazon's selected data compares only the high end of the current price point, where the comparison looks most favorable.

But there's still more. The data used to compare book prices was taken from a market where the comparison can even occur. In a market where all ebooks are a maximum of $9.99, will book volume as a whole magically expand 74 percent? Not a bloody chance. Amazon doesn't overtly state that it will, but its arguments are cleverly designed to let you come to that conclusion on your own.

The ebook market would certainly expand above and beyond the already-high annual increases we've been seeing for years. But most of that extra expansion would cannibalize print book sales. The overall book market would see a much, much smaller increase, and I can not imagine it would be enough to offset the total depreciative effect of the new, lower price points.

That's a key point. Amazon is pitching its desired ebook price point as having only a positive impact on publisher and author revenues, and that simply isn't the case. Most of the increased ebook revenues would come at the expense of print revenues, not be entirely new revenues.

Amazon, though, would have much more share, and that's the retailer's real goal.

And realize that Hachette and the other publishers understand this. They're not so stupid as to willfully turn down MOAR MONEY. They understand that the market as a whole is far more complex than Amazon is painting it with this one blog post, and that's why Hachette is fighting this battle.

But there's even still more.

Next: The Race to the Bottom and Quality

Page 3 - The Race to the Bottom and Quality

My entire beef here is that publishers play a huge role in the quality of the books that I, a book lover, get to read. Amazon is engaged in a race to the bottom with ebooks and print books alike, and that race to the bottom will take an ever-higher toll on book quality.

We saw what the race to the bottom did to the PC market in the 90s. Quality and innovation went out the window, and that happens with any race to the bottom. The only thing that arrested the decrepit decline that beset the Wintel PC industry was Steve Jobs changing the rules by which Apple competed.

Today, Macs remain high quality devices that Apple makes a healthy profit from selling. Apple uses those profits for R&D (and for the enrichment of its shareholders), and it was that R&D that led to the iPod, iTunes, iPhone, iOS, iPad, and soon, something in wearables.

In the ebook market we saw the same effect on quality when Amazon was dumping best sellers below cost to gain Kindle share. There was no innovation in the ereader experience that Amazon created (to its credit) with Kindle until Apple changed the rules.

Rather than competing on price with iBooks, Apple competed on experience (and so did Barnes & Noble with the Nook). Amazon, too, was forced to increase the quality of the Kindle experience. When experience became the competitive factor, Apple gained share (as did Nook). Now we're back to price, and Amazon is again gaining share, and I doubt we'll see much improvement in the Kindle ebook experience.

There's a common understanding that great books are the product of one person—the writer. Nothing could be further from the truth. Most books are the product of a writer who has dedicated months or years to the task of writing, an agent and his or her interns, a publishing editor, and various copy or line editors. All of these people have a significant impact in the overall quality of any given book.

In addition to those folks, there is the cover artist, the type setter (a similar position is needed for ebooks), the marketing team, and an army of accountants who keep all the numbers straight.

But the biggest role is that of the publishing editor and the next biggest role is the agent. Both professions often play an enormous role in developing the books you read. From finding plot holes to seeing characters and events with a different eye, you can find a limitless number of authors who talk about how their editor or their agent saved or improved their book.

As a whole, new authors benefit the most from this help, and it sometimes takes many books and many years for authors to learn enough that they can turn out quality seemingly effortlessly. Here's what my first attempt at writing a novel metaphorically resembled:

Self publishers do all of these things themselves (to a greater or lesser degree of effectiveness), or subcontract out to others. You can hire an editor, a copy editor, and a cover artist all day long for prices ranging from a little to a lot.

But the cost of hiring the same skill level that comes from a publisher, and more importantly, the same amount of time and attention from those skills is prohibitive for all but the already-rich. As it is, it's prohibitive for self-published authors to hire even a fraction of the attention they might receive from a publisher.

I'm not saying that editors for hire aren't good—many are amazing—I'm saying that hiring them to devote the level attention many books need would cost far, far more than you think. Most aspiring authors simply won't be able to.

Another interesting aspect of all this is that established authors indirectly fund development of the next generation. That's because few new authors sell enough copies to bring an ROI to the publisher, but the established names bring in enough profit for publishers to risk a little on new authors. The publishers then comb through those new authors, train them, and hope that a small percentage go on to be successful enough to pay for the generation after that.

The race to the bottom threatens this process. As margins go, resources go. Publishers merge. They lay off those teams that help writers make great books. They sign fewer new authors and pay out smaller advances. Fewer authors can quit their day jobs to dedicate themselves to the craft of writing. Publishers spend less on marketing. Etc.

Some people, like my friend Dave Hamilton, think that this is not only inevitable, it's the way it should be—that authors must simply adapt to the new reality being ushered in by Amazon. I see the infrastructure that is needed behind that writer and believe that the race to the bottom will eliminate that infrastructure, and that overall book quality will degrade. I don't want that future.

We saw it with PCs. We see in every market where there is a race to the bottom. We'll see it with books.

Amazon doesn't care about that. Amazon wants to sell all of the books, and who cares about quality or training or anything else? At the end of the race to the bottom, we'll still have books and we'll still have publishing in one form or another, but I can guarantee you that the overall quality of those books will be lower.

Page 4 - Amazon's Blog Post in Full

Update re: Amazon/Hachette Business Interruption

With this update, we're providing specific information about Amazon's objectives.

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there's no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market -- e-books cannot be resold as used books. E-books can be and should be less expensive.

It's also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that's 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who's trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

Keep in mind that books don't just compete against books. Books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.

So, at $9.99, the total pie is bigger - how does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% -- we did have a big problem with the price increases.

Is it Amazon's position that all e-books should be $9.99 or less? No, we accept that there will be legitimate reasons for a small number of specialized titles to be above $9.99.

One more note on our proposal for how the total revenue should be shared. While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.